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3 Top Turnaround Stocks

Go ahead, be contrarian -- just make sure you're right.

In the stock market, few things are more enjoyable than owning a stock on the cusp of its own massive turnaround. After all, many fortunes are made by the investors who succeed in buying great businesses:

During times of maximum pessimism.

While they're being ignored and forgotten.

When they're being beat down to bargain-basement levels.

Meet the turnaround tycoonsNotable investors who've followed this strategy include Warren Buffett, John Templeton, Seth Klarman, and many more.

We probably can't help you with your contrarian spirit, but we can offer you three possible turnaround ideas from our Motley Fool CAPS community. Despite being down 15% or more over the past three months, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

Company

3-Month Return

Industry

Current CAPS Rating (out of 5)

American Science & Engineering(Nasdaq: ASEI)

(36%)

Security and protection services

****

Ameresco(NYSE: AMRC)

(19%)

Industrial electrical equipment

*****

BHP Billiton(NYSE: BHP)

(18%)

Industrial metals and minerals

****

Sources: Motley Fool CAPS.

These stocks have been slammed for very specific reasons, so don't view them as formal picks -- just ideas you might want to investigate further. With that said, let's see exactly why some of our CAPS members believe they're good bets to bounce back.

Bomb-detecting bargainWith its stock down more than 35% over the past three months, X-ray inspection systems specialist American Science & Engineering tops this week's list of losers. The tightening of the U.S. defense budget has certainly put a hurt on the company's new orders and deliveries, but Mr. Market seems to be forgetting about its proven cash-generating prowess. While budgetary pressures have left no shortage of cheap defense stocks to sift through, American Science's above-average growth prospects and price-to-cash flow of 6.9 -- a clear discount to giants like Lockheed Martin (9.2) and Boeing(NYSE: BA) (9.0) -- make it a solid place to start.

Sell-off is wildly overdone. This company is a cash machine, selling for barely twice the level of cash on hand. Buy. Then buy more.

Efficient opportunityEnergy efficiency specialist Ameresco is yet another stock being pressured due to its exposure to the U.S. government. But while a string of recent earnings misses have fueled Wall Street fears over weak spending and expiring renewable energy subsidies, the company's steadily growing backlog remains a positive long-term sign. In the most recent quarter, management even said that it's been a challenge to keep up with recent demand, suggesting that the disappointing headlines of late are just a short-term blip.

Looks pretty cheap for such a small company growing sales. ... [I]nsiders own 36%. Basically what they do is help businesses save money on their energy costs through building and engineering projects. This field is really just getting started and so is this company.

Value down underOur last turnaround candidate this week is Australian mining giant BHP Billiton, whose shares continue to trend downward on Europe's debt crisis and slowing growth in China. Earlier this month, in fact, both BHP and peer Rio Tinto(NYSE: RIO) announced intentions to rethink spending amid the weak demand outlook, prompting impatient investors to quickly head for the exits. Of course, when you couple BHP's well-diversified cash flow base with the attractive long-term prospects for global economic growth, the stock's risk/reward trade-off seems attractive at this point.

In my opinion, BHP represents the best single company diversified natural resources play. ... [BHP] delivers exactly what the world's rapidly industrializing and growing nations need. Once China stops worrying about inflation and sorts its real estate bubble out, BHP will be a home run.

Now, it's your turn(around)Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that they require a little more effort to figure out.

But if you're crunched for time, we've compiled a special free report called "The Stocks Only the Smartest Investors Are Buying," which uncovers several other bargains that the value master himself, Warren Buffett, thinks highly of. The report is 100% free, but it won't be around forever, so click here to access it now.